Transcript Chapter 24

Engines of Growth and
Africa’s Economic Performance
ECON 3510
(Text Chapter 5)
May 13, 2010
Approach of Text

Outline Approaches to explaining economic
growth and standards of living;
1.”Elementary Engines of Growth” (Theft, Cartels,
Prices)
2. “Static Engines…” (“Putting idle resources to
work, Allocative efficiency, Comparative
advantage)
3. Accumulation of Productive Resources (Physical
Capital, Human Capital,
4. Dynamic Effects (Increasing returns, learning by
doing)
5. Technological Change
6. Agglomerative Effects

Examine relevance of each approach to Africa
I.
“Elementary Engines of Growth”
1. Theft via Conquest;
taxation of the vanquished.
Enslavement of the vanquished
2. Cartel Formation (a la OPEC)
3. International Commodity Price Fluctuations
Relevance for Africa?
“Static Engines of Growth”
1. “Vent for Surplus” or “Put idle resources to
work” How? ….
2. “Allocative Efficiency”: allocate resources in
the most efficient way possible. How? “get the
prices right; cut interference by the state; anticombines policy…
3. Trade & Comparative Advantage
Relevance for Africa?
Author’s Conclusion:
These are important, but do not explain the rise of
incomes in DMEs or middle income LDCs
Productivity: Its Role and Determinants
A country’s standard of living depends on
its ability to produce goods and
services, i.e. “Productivity”
Productivity refers to the quantity of
goods and services that a worker can
produce for each hour of work.
What explains productivity?
Example of the role of Productivity in
shaping Production per person:
Agriculture in Canada and Africa Generally
Canada:
- most up-to-date technologies (seeds, machines etc.)
- large farms, much land per farm family;
- much machinery, equipment, buildings & livestock
per farm; - much education per farmer;
- serviced by a broad range of other activities
(machine dealers, transport, fertilizer firms, R&D, etc.)
** about 4% of the labour force is in agriculture; yet
Canada has large “net exports” of food.
Sub-Saharan African Agriculture:
- traditional simple technologies;
- small farms; little land per farm family;
- reliance on simple hand tools, e.g. hoes,
machetes and pangas;
- little education for farm people;
“Great skill; simple technology”
** around 60-80% of the labour force in
African countries is in agriculture.
Result:
One Canadian farm worker feeds
+/- 25 to 30 people, plus exports;
One African farm family feeds itself and
about one additional person on average.
Implications ??
How Is Productivity Determined?
The Factors of Production include:
1. Physical Capital
2. Human Capital
3. Natural Resources
4. Technological Knowledge
 Capital
is a produced factor of production, i.e.
capital is an input into the production process that in
the past was an output from production.
To which I would add
5. “Enterpreneurship” and
6. “Social Capital”
The Factors of Production:
1. Physical Capital
The stock of equipment and structures that
are used to produce goods and services.
Examples:
Produced through investment.\
How to achieve growth? Save and Invest in
Physical Capital
As a theory of growth?
Necessary but Insufficient
Relevance for Africa?
The Factors of Production: 2. Human Capital
The economist’s term for the knowledge and skills that
workers acquire through education, training, and
experience.
Like physical capital, human capital raises a nation’s
ability to produce goods and services.
Produced through investment in people
Examples: family environment, health, education,
nutrition, sanitation, on-the-job training; water
availability
As a “Theory of Growth”? Important but not the whole story
Relevance for Africa?
The Factors of Production:
3. Natural Resources
Inputs used in production that are provided by Mother
Nature, such as land, rivers, and mineral deposits.
– They may not be necessary for an economy to be highly
productive
– but they sure can help
[or sometimes hinder: the “curse of oil wealth”]
– Renewable Resources:
 Trees, forests, fish stocks
– Non-Renewable Resources:
 Oil, natural gas; minerals of various sorts
[Note: These also usually require Investment for
their harnessing by humans]
Relevance for Africa?
The Factors of Production:
4. Technological Knowledge
Definition: The understanding of the ways to produce
goods and services; how factors of production of
all kinds can be combined to produce goods and
services
Human Capital refers to the resources expended
transmitting this understanding to the labour force.
Note: Both of these are produced by “investment:”
– Education, training & learning of all sorts; and
– R&D
Technological Change: a “dynamic” factor:
Includes:
– Embodied tech in capital equipment
– Embodied in Consumer Goods
– Scientific & tech journals, texts and
publications
– Patents, intellectual property
– Process technology
– Embedded in people’s brains and
capabilities
– In established enterprises
Can raise the productivity of Labour and
Capital and can economize on resources.
Examples:
Technological Change: a “dynamic” factor:
Relevance for Africa?
Relevance for Africa
– Existence of a “backlog” of knowledge:
A
broad range of newer technologies is awaiting
implementation in Africa
 Investment in new technologies via R & D is
expensive and out of reach
– Transfer of Tech embedded in capital goods
requires high levels of Investment and
Savings and/or large role for MNC.
Therefore S & I are doubly important
– The possibility of “catching up” (applying
newer technologies to a broad range of
activities)
 Via
purchases of capital equipment;
 Via purchases of new consumer goods
(telephones, computers, drugs & medications,
new plant varieties…..)
 Via learning from books, manuals etc…….
 Via tech transfer in enterprises or purchases
of process systems
Factors of Production: 5. Entrepreneurship
Note: This is not in the text but is nonetheless important.]
Entrepreneurship:
- performs a central role in an economy
- largely ignored in economic theory
An entrepreneur:
- perceives and seizes an opportunity for the achievement of an
objective,
- visualizes and plans how the objective can be achieved,
- undertakes to do everything necessary to implement the vision,”
- brings together all of the other factors of production;
Entrepreneurship is the “Key Factor of Production”
Could operate in politics, academia, religion, music,
sports, or any area of human endeavor.
It can be exercised in different varieties of economic
system andin the private, public and voluntary sectors

Harvey Leibenstein (1968). The key author in this area
identified the following roles of entrepreneurs:
– a “market connecting role,” (linking up the potential
market for the outputs with the markets for all the
relevant inputs);
– a “gap-filling role,” (doing what is not normally or easily
done through markets);
– an “input-completing role,” (improvising the provision
of all the inputs necessary for the enterprise); and
– an “enterprise creating role,” (bringing together the
inputs for the production of an output over a period of
time and in some sort of organization).


In pathological circumstances - entrepreneurship may
become deformed.
When law and order break down or when
entrepreneurial activities are illegal,
entrepreneurship may become criminalized,
perhaps within Mafia-like organizations.
Entrepreneurship alone is insufficient to generate
growth and development.
Instead, it requires a supportive, legal, and orderly
institutional environment.
[Source: H. Liebenstein, “Entrepreneurship and
Development,” American Economic Review, Vol. 58 No. 2,
May 1968.]
Relevance for Africa?
Agglomeration Effects
–
–
Economic Geographical Factors;
the economics of industrial location
1.
Agglomerative economies


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





(Providing cost advantages to producers)
infrastructure;
skilled labour pools;
availability of necessary inputs, repair services, etc.
government services and bureaucracy;
markets;
diversified range of all economic activities
financial institutions, educational institutions;
technological funnel effect
Amenities
2. the "clustering" phenomenon (to be
elaborated in class)
– Note the importance of collective action and group trust
among producers
– "cumulative and circular causation“
3. Note the normal hierarchical structure of
institutional structures and urbanization patterns
everywhere;
–
("Central Place Hierarchies")
4. Transportation “Nodes”
Relevance for Africa
– past geographical disadvantages (re
communications, rivers, roads & railways)
– Future potentials will open with new transport
infrastructure
– Importance of establishing health & attractive
urban centres
to reap “agglomeration economies” and change the
cost/benefit calculus re industrial locationl
 Importance of focusing on “clusters” of economic
activities

– Importance of Imports of Capital Equipment,
implieas also export orientation.
Factors of Production: 6. Social Capital

“Social Capital:” increasingly recognized as an
additional “factor of production” as well as being of
significance from a political science or governance
perspective.

Various analysts emphasize the importance of
“social capital” in an economy, and as a factor that
can promote economic development and for the
reduction of poverty.
[See the World Bank Web Site on social capital:
http://www1.worldbank.org/prem/poverty/scapital/home.ht
m]
What is Social Capital?

“Social capital refers to the institutions,
relationships, and norms that shape the quality
and quantity of a society's social interactions..
 Social
capital is not just the sum of the
institutions which underpin a society – it is the
glue that holds them together.”
– [Source: the above-mentioned World Bank Web
Site]

Social capital refers to connections among
individuals – social networks and the norms of
reciprocity and trustworthiness that arise from
them.

Social Capital would include
– Formal institutions
– the formal and informal associations between
people for many purposes: recreational, civic,
economic, friendship, ethnic, ….)
– the informal relationships between people at the
work-place (enterprises or governmental or “notfor-profit”), the community,
– civic responsibility at all levels (Parent teachers
associations, block associations..)
– honesty, “trust” and civic virtue
How Could Social Capital be a “Factor of
Production”?
1. Enterprises and bureaucratic or governmental offices
can only operate effectively if there is a level of
honesty and trust among the employees.
- corruption, distrust and dishonesty can lead to
ineffectiveness and break down
2. The stronger the associational ties among citizens the
stronger will be the cooperative efforts among people
and the more effective will enterprises and
bureaucracies be.
Mancur Olsen disagreed:
some such associations may push for their own interests at
the expense of the general good.
Reference: [Putnam, R. D. (1995) 'Bowling Alone: America's Declining Social Capital',
Journal of Democracy 6:1, Jan, 65-78.
http://muse.jhu.edu/demo/journal_of_democracy/v006/putnam.html]
Relevance for Africa?
The Production Function
Income depends upon Labour, Physical Capital, Human
Capital and Natural Resources:
or:
Y = AF(L, K, H, N)
where “A” is a variable that reflects production technology
Constant Returns to Scale: a doubling of inputs causes
output to double as well. Then:
xY = AF(xL, xK, xH, xN)
Then if we set x = 1/L, then:
Y/L = AF(1, K/L, H/L, N/L)
Meaning? Output per worker depends upon capital per
worker, education etc per worker, and natural
resources per worker.)
IV. Economic Growth, Development
and Public Policy
 Public
policies, laws, traditions, and
institutions are critical to transforming
resources into useful output.
 Governments can do many things to
encourage or impede the attainment of
high living standards.
Government policies:
–
–
–
–
–
–
Establish law and order, political stability
and secure property rights
Encourage investment in human capital,
esp. education, training, health …....
Encourage saving and investment
Promote liberalized trade and technology
policies
Control of population growth
Promote research and development and
technological change
Government policies:
1. Encourage saving and investment
 One
way to raise future productivity is to invest
more current resources in the production of
capital.
 Governments can encourage capital accumulation:
– from domestic sources by imposing reasonable
taxes on interest and dividend income.
– Provide relevant infrastructure
–
From foreign sources by making such capital
secure and welcome domestically.
More on Investment:
Digression on Foreign Investment
Investment from Abroad
- Direct Investment and Portfolio Investment
Benefits from Direct Foreign Investment:
- supplements domestic savings;
- transfer of new technology, usually;
- higher-productivity job creation;
- capital goods importation in a working package;
- entrepreneurial and managerial importation;
- access to foreign markets some times.
Costs of Direct Foreign Investment:
– Profit expatriation into the future;
– Foreign enterprise interests may diverge from host
country’s national interest
– Does technology really get “transferred “ in a
meaningful way?
– Is domestic entrepreneurship promoted or stifled?
– Are inappropriate consumer patterns or producer
technologies transferred from DFI? (notably for poor
countries?)
Government policies:
2. Encourage education and training
 Education
and training are at least as important
as investment in physical capital.
 Considered
as essential “public goods” in
virtually all countries, [but also as partial
“private goods” as well]
 It
is necessary for countries to provide basic
education so that the work force can acquire the
specialized skills leading to higher productivity.
The Role of Government:
3. Establish political stability, good
governance and secure property rights.
– The maintenance of “law and order”
are vital
– Political stability is also vital to
promote savings, investment and
productive activities
– Representative Democracy?
Government policies:
4. Promote Trade Liberalization
 To
exploit comparative advantage and
maximize production and efficiency, it is
important for countries to have the
opportunity to sell abroad and to be able to
purchase from lower opportunity cost
producers.
 Some
–
–
countries engage in:
Inward-orientated trade policies
Outward-orientated trade policies
Contentiousness of the issue:
“Globophobiacs” vs. Economists & Practicioners
Some Examples:
1. South Korea vs North Korea
2. Latin American Cases
3. China,
4. “Asian Tigers”
5. Ireland & Estonia
Explanations?
Government policies:
5. Control of Population Growth
 Population
is a key determinant of a country’s
labour force. Large populations tend to
produce greater total GDP, however.
–
–
Higher GDP doesn’t mean “higher wellbeing”, GDP per person is more accurate.
High population growth reduces GDP per
person.
Government policies:
6. Research and Development

Fundamental Research: in Universities, public
sector and private enterprises;
Expensive; of lesser relevance for many African countries
at this time

Innovation and applied technological
advancement: usually implemented by private
firms and public agencies.
– Important at this time

Government’s role is to encourage applied
research and development of new technologies
and
Hans Rosling on Information
regarding Development

http://video.google.ca/videoplay?docid=26708207
02819322251
“Gapminder World” (Rosling’s
http://www.gapminder.org/
Website)
Hans Rosling, Professor of International Health, Karolinska
Institutet, Stockholm, Sweden since 1998, uses animated charts
and minimalistic diagrams to explain the world we live in.
Poverty, income levels, income distribution and health can be
seen at once shaping or being shaped by world events,
technology and the passing of time.